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Understanding Developer Obligations and Guarantees in Subdivision Ordinances

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This document outlines the statutory requirements for guarantees in subdivision developments, specifically focusing on the obligations of developers under G.S. 160A-372(c). It details different types of guarantees such as surety performance bonds, letters of credit, and cash or equivalent surety. The text also describes the requirements for surety bonds and letters of credit, including necessary language and conditions for payments. Additionally, it provides strategies for protecting clients in these agreements, ensuring developers adhere to their commitments regarding improvements and defaults.

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Understanding Developer Obligations and Guarantees in Subdivision Ordinances

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  1. Subdivision Developer Defaults Bobby Sullivan and Susan Matthews July 31, 2009

  2. Statutory Requirements for Guarantees: G.S. 160A-372(c)

  3. Define Developer’s Obligations

  4. Subdivision Ordinance Language:Amount of Guarantees

  5. Guarantees • Types of Guarantees: • Surety Performance Bond (required) • Letter of Credit (required) • Cash or Equivalent Surety (optional) • Letters of Credit may be preferable to the City. • Surety Bonds may be cheaper and easier for the Developer to obtain.

  6. Requirements of Surety Bonds:Standards for Surety Companies

  7. Requirements of Surety Bonds:Bond Language • No expiration date; Bond lasts until improvements are completed and approved by the City. • Time limit in which a Surety must begin acting after Default. • Form Surety Bond.

  8. Requirements of Letter of Credit:Standards for Issuing Bank

  9. Requirements of Letters of Credit:Letter of Credit Language • Should be irrevocable • Should condition payment upon presentation of a statement only • Should not expire prior to the Developer’s time for installation • May want to require evergreen letters of credit • Allow for local presentation

  10. How To Define Default? • Developer fails to complete improvements in the time allotted • Developer completes improvements, but they do not meet specified standards • Ownership of property changes without the new owner assuming the obligation to install improvements (e.g., foreclosure)

  11. Anticipation of Default

  12. Anticipation of Default (con’t)

  13. Process for Collection on a Surety Bond • Send written notification to the surety stating that the Developer is in default and include a statement of the estimated cost for installation of the improvements (including cushion). • Demand the surety take action within the time specified in the bond. • Surety will either hire a substitute contractor or deliver funds to the City for installation. • If surety does not act, the City will have to file a lawsuit.

  14. Process for Collection on a Letter of Credit • Make sure you comply strictly with the requirements of the letter of credit. • Present in advance of the expiration date, so that you have an opportunity to cure any defects, if necessary.

  15. Top 10 Ways to Protect Your Client: • When possible, use a development agreement which expressly lists all guaranteed improvements, the time period for installation, and the definition of default. If you do not have a development agreement, you should make sure that your ordinance states a definite time in which improvements must be installed and approved and that it defines default. • Require the Developer to Guarantee at least 125% of the estimated costs of improvements. • Require any surety bonding company to be registered with the N.C. Secretary of State, licensed with the N.C. Department of Insurance, highly rated by a credible rating agency, and backed by a sufficient amount of assets.

  16. Top 10 Ways to Protect Your Client: • Require a surety bond to be effective until all improvements are completed and accepted. • Require that the surety bond contain a set time period in which the surety must act following default. • Require that any bank issuing a letter of credit must allow for local presentment and have a sufficient amount of assets. • Require a letter of credit to be irrevocable, have a duration exceeding the time period the Developer has for installation, allow for local presentment, and require only a written statement of default for collection.

  17. Top 10 Ways to Protect Your Client: • Have your engineer perform a detailed inspection of the guaranteed improvements no later than 60 days prior to the Developer’s deadline for installation. • Make sure you mail the surety a letter 30 days prior to the Developer’s expiration of time for installation informing the surety that there is a potential for default. • When collecting, make sure you strictly abide by the requirements contained in the letter of credit.

  18. www.parkerpoe.com

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